morpheustrading

Scanning for reliable chart patterns is obviously one of the most important factors that determines which stocks and ETFs traders should buy. However, just because a stock has a bullish chart pattern does not mean you should automatically consider buying it. In addition to assessing overall market conditions, you must also determine if every potential stock trade also has the proper amount of volatility and liquidity. Read on to learn how to consistently choose only stocks with ample volatility, liquidity, and reliable chart patterns (the “triad of trading profits”), which directly impacts your long-term trading gains. The Perfect Balance In our style of stock trading (short to intermediate-term swing), we look to trade with the prevailing trend, which is usually in the direction of the 50-day moving average. When the market is in trend mode to the upside, it is important to expose our capital to as many bullish situations/setups as possible, in order to maximize trading profits. To do so, we focus on swing trading stocks that are volatile enough to produce gains of 20% or more in a short period of time, which allows us to rotate the portfolio, and again, maximize profits. Nevertheless, the process is not as simple as building a portfolio of the most volatile stocks in the market and letting the chips fall where they may. The goal in selecting the best stocks to buy (in a bullish market) is to achieve the perfect balance between volatility, liquidity, and reliable chart patterns. Finding The Triad How we screen for a stock that has the winning triad of volatility, liquidity, and chart pattern reliability is actually easier than it may sound. Volatility To determine the true volatility of a stock, we utilize a simple and highly effective formula known as the Price/ATR Ratio. When using a trading platform like TradeKing or TradeMONSTER (get free trades for 60 days), we start by displaying the ATR (average true range) of a stock. An objective, technical measurement of a stock’s volatility, ATR is calculated as the greatest of the following: *current high less the current low *the absolute value of the current high less the previous close *the absolute value of the current low less the previous close Put another way, ATR basically measures the average intraday trading range of a stock. We use a 40-day ATR, which tells us the average daily volatility of a stock, as averaged over the past 40 days. To balance out the effect of higher priced stocks automatically having a greater trading range because of their high prices, we next divide the last price of a stock by its 40-day ATR (average true range). For example, if a stock with a $40 share price has a 2-point ATR, it trades at 20x its ATR ($40/2). A $40 stock with a 1 point ATR trades at 40x its ATR ($40/1). With this ratio, a lower number indicates a more volatile stock than a higher number (which is better for momentum swing trading). When dividing the stock price by its ATR (Price/ATR Ratio), 40-50 is roughly an average number where most stocks will fall. However, we prefer to trade stocks with a 20-50 Price/ATR ratio. A stock with a ratio above 60 is usually (not always) too “slow” to trade. Conversely, a stock with a Price/ATR Ratio below 20 means the stock may be a bit too volatile for our tastes. Liquidity The second component of scanning for suitable stocks to trade is liquidity. To qualify as a potential swing trade with full position size, individual stocks should trade with a minimum average daily volume of at least 1 million shares. Some stocks we trade have far less than 1 million shares per day changing hands, but we always reduce our position size in such a situation. Higher priced stocks are ideal, as they allow funds to maneuver in and out of trades with ease, and you should never avoid a high-priced stock, even with a small trading account. Note that our requirement for 1 million shares per day is only for individual stocks; we have a much lower requirement for ETFs, as high average daily volume is largely irrelevant when trading ETFs. Reliable Chart Patterns The final component in the triad of stock selection is subjective and deals with spotting good-looking charts that can produce low-risk, reliable buy entry points. Fast-moving stocks require low-risk entry points, which allow us to minimize risk and maximize the reward to risk ratio for each new swing trade entry. This article is not about how to find the best and most reliable chart patterns, but this article will point you in the right direction for the third element of finding the top stocks to buy. Volatility & Liquidity In Action Based on our system, Tesla Motors ($TSLA) is an ideal stock with a Price/ATR Ratio in the 30s and plenty of liquidity: Another solid stock to trade is SolarCity Corp. ($SCTY), which is nicely volatile with a Price/ATR Ratio of just 23: With a Price/ATR Ratio of more than 70, Cisco Systems ($CSCO) is too slow for us and is an example of a low-volatility stock we would not look to trade: With individual stocks, we usually pass on trade setups with a Price/ATR Ratio over 50. The ratio can be a bit higher for ETFs, which are generally slower-moving than stocks, but you should avoid ETFs trading with a Price/ATR Ratio of more than 80-90. The iShares Long-term T-Bond ETF ($TLT) is, for example, an ETF we would typically not look to trade. Although it is high-priced (which is generally good), it has a very low ATR. As such, the ETF trades at a price of 118 times its ATR. With a Price/ATR Ratio of 118, $TLT is simply too slow to trade: Are You Maximizing Your Potential Trading Profits? Unless you have the luxury of a trading account with virtually unlimited funds, it is crucial to scan for stocks that provide you with the most potential “bang for the buck” (highest profit potential when they take off). Although there may be hundreds of stocks with nice-looking chart patterns in a typical bull market, getting in the habit of checking for ample volatility (Price/ATR Ratio) and liquidity is an excellent way to further narrow down your arsenal of potential stock trades to consider.

Whenever I receive a question I think will be beneficial to other traders who may be wondering the same thing, I share the question and my reply with other traders. In this post, a trader is seeking advice on how to size positions within his portfolio, and also clarification on whether or not the share price of a stock is important. His questions are below, followed by my actual reply… Hi, I signed up for a 3 month stint with your company. I think it is worth at least three months to see if it fits my lifestyle. So far I like the approach you have. It is a cautious approach, which is what I need. I think the slow and cautious approach fits me well. I wonder if someone could share some philosophies with me and maybe answer some questions? I have been trading off and on for years so I have a decent understanding of how things work. I am not an expert. I do feel that the more money you have to invest per trade the better return you get on the investment. What I mean is that if you buy 10 shares of a 100 dollar stock, or a $1000 investment and that stock moves to $101 that is a 1% return or $10 which is a profit, but after trading fees that is a loss. However if you can invest $100,000 that same trade give you a $1000 profit. So the size of the portfolio does matter. I simply explain this to setup my questions. I know you guys understand the above. Honestly, my portfolio for this type of investing lingers between 25K and 30K. When I apply all your rules for the size of an investment I would typically be investing somewhere between $500 to $1000 per trade. So for stocks that trade around 10 or 11 dollars per share, I get more shares and a better opportunity to make a few hundred dollars if the swing trade is positive. Things become difficult when you suggest stocks that trade at 80, 90, or 100 dollars per share. Or even worse TSLA is above 200. Which is not a huge deal if you have a larger portfolio. Now with all of this being said, I guess I am simply looking for advice about how I should be approaching things? Or how would you approach things if you were in my position? The more money you have the easier things get, to a degree, and I do understand this. As I try to learn it helps to just hear from experts like yourselves about where my head should be at with respect to my level. Just thinking about it on my own I have wondered if I should make two or three investments that are worth 5K to 10K a piece and approach it like that. There is more risk, but with the stop loss approach I can minimize my risk to a degree. The larger investment give me a greater opportunity to make money, but it also has greater risk. Plus with my limited funds, I can’t always take advantage of a setup you suggest. Hopefully my minor confusion is something you can advise me on. Thanks, D.S. Hi D.S., Great questions. With 25-30k, you may have to stick with fewer positions to make decent gains. Maybe 4 to 5 positions at 5k each. Key here is that you want to take on more core trades when you can, which will enable you to hold stocks longer. You may still be able to take on a few swing trades, especially if you are not fully invested. So, for example, with 5 positions at 6k, you have 20% positions. Say we grab 3 full 20% positions; that will leave you with 2 empty slots. Now, those 2 empty slots can be 2 core positions at 20%…or maybe 4 quick swing trades at 5%. So you can grab 5 full, 10 half, or any sort of mix; it is a very fluid approach. When you have a full portfolio, you do nothing. If we stop out and you have a 20% position open, and the next trade is a swing trade with 33% size, maybe you take a 5-7% position. And you could even take another one until a new core position comes along and you need the money. Regarding cheaper vs more expensive stocks, it really should not make a difference [in your overall return]. Actually, if you stick with expensive stocks, you have cheaper execution cost due to fewer shares. With a $5 stock, you would need 1200 shares on a $6,000 position (resulting in $24 round trip at a broker like Interactive Brokers that charges 1 cent per share). For $TSLA [just over $200 per share], you would only need 25 shares, resulting in a $2 round trip commission fee. Now, if $TSLA were to go up 20%, then your $6,000 would increase to $7,200. Similarly, if the $5 stock rallied 20%, then your $6,000 would also become $7,200. It is the same difference [in profit]. Also, you get the added benefit of holding an “A rated” stock like $TSLA [accumulated by institutions] versus some junk stock that is cheap. Let me know if you have further questions. Regards, Rick It’s a common mistake among newer traders to shy away from expensive stocks, based on the assumption that not as many shares can be bought with a smaller account. But as explained above, this is a mistake because it does not make a difference to your bottom line; a 20% gain on a $100 stock is the same dollar return as a 20% gain on a $10 stock (actually, slightly more due to lower “per share” commission fees). Remember that expensive stocks are expensive for a reason — institutions are buying them (you should too). Also, if your trading account is not yet that large, you now have some ideas on how to be flexible with regard to buying stocks. In this case, focusing on our intermediate-term core trades may be more profitable than trying to enter all the shorter-term swing trades.

For what it's worth, here are my thoughts on the state of gold right now (reposting from my recent blog article): From 2001 to 2011, the spot gold commodity thrilled gold bugs with nearly an 800% gain over the course of a decade-long bull run. Traders and investors of SPDR Gold Trust ($GLD), a popular ETF that follows the price of spot gold, also benefited quite nicely. Yet, even the most impressive rallies of any stock market in the world eventually run out of gas and enter into significant corrections or bearish trend reversals. For gold, that correction began in late 2011, and the precious metal has been in a downtrend ever since. On the long-term monthly chart of $GLD below, check out the clear downtrend line that began nearly two years ago: Although $GLD is still in a downtrend (until it convincingly breaks out above the $128 to $130 level), there are now 3 great reasons to buy gold in anticipation of a substantial, intermediate to long-term rally and/or bullish trend reversal. Going into today (May 5), I have listed a gold ETF for potential buy entry in my trading newsletter for the following three reasons: 1.) Double Bottom On $GLD Weekly Chart When looking to buy a stock or ETF that is in the process of reversing a lengthy downtrend, it is easy to make the mistake of buying too soon (before a convincing bottom is in place). An easy way to avoid that problem is to wait for the formation of either a higher low or double bottom to form. Drilling down to the shorter-term weekly chart below, notice the double bottom that clearly formed in December 2013 and January 2014: Although a double bottom is an encouraging sign that selling pressure in downtrending stocks/ETFs is evaporating, it is important to have additional price confirmation before buying. With $GLD, the price confirmation that followed the double bottom has been developing over the past six weeks, in the form of… 2.) Bullish Consolidation, Reversal Candlesticks, And Volume Patterns For the second week in row, and the third week within the past five weeks, $GLD tested and held support at the $123 area (pink rectangle on the chart above), then reversed to close near the highs of the week. The multiple bullish reversal candles are a clear indication that bullish momentum is finally starting to dominate. The 40-week moving average (orange line) has flattened out over the past few months, which is a bullish sign, but the 10-week moving average (teal line) has recently turned down. As such, $GLD will need to deal with overhead resistance around the $127-$128 area on its next rally attempt (the 20-month downtrend line also converges near this level). Nevertheless, I really like the solid support that has formed near the $123 level, which could turn out to be the lows of the current correction off the recent swing high. Finally, the volume pattern over the past six weeks has also been bullish overall. Turnover dried up throughout the first three weeks of the six-week consolidation, then began expanding as the bullish reversal candlesticks formed over the past two weeks. Lighter volume during the initial stages of consolidation is positive because it indicates the sellers are drying up, absorbing overhead supply and making it easier for the equity to move higher when the buyers return. The higher volume that followed over the past two weeks is bullish because each of the two bullish reversal candlesticks that formed. 3.) Gold Is A Great Alternative In A Shaky Market The third reason to buy a gold ETF right now is not based on technical analysis, but is instead a bit of a bonus reason to start taking a position in $GLD or similar ETF. Although the S&P 500 is easily within striking distance of breaking out to a fresh 52-week high any day now, the NASDAQ Composite remains below pivotal resistance of its 50-day moving average and stuck in a 2-month downtrend. Unless the NASDAQ suddenly gets in gear and breaks out above multiple resistance levels, the tech-heavy index is likely to remain a drag on the broad market in the near to intermediate-term. As such, our overall bias remains on the short side of the stock market, as well as buying ETFs with low to zero correlation to the direction of the main stock market indexes. Commodity ETFs such as $GLD typically move independently of the main stock market indexes, and are therefore a nice alternative to buying individual stocks right now. Would You Like A Slice Of Leverage With Your Gold? Trading an average daily volume of 7.5 million shares, $GLD is the most popular gold ETF. However, if you have a small account or are seeking greater potential returns, you might consider buying one of the leveraged gold ETFs instead. Like $GLD, the Gold Double Long ETF ($DGP) tracks the price of spot gold commodity, but is leveraged to move at double the percentage gain/loss of gold futures. For even more bang, you may even consider buying $GLDL or $UGLD, both of which are designed to move at three times the price of spot gold. As a reminder, leveraged ETFs are most suitable for short-term (and sometimes intermediate-term) momentum trading because they often underperform their underlying indexes as holding period increases.

Totally agree that intermediate to long-term trend is rock solid. Only expecting a correction of 4 to 8 weeks or so. But then again, I prefer to react to price action, rather than predicting it, so I'm cool either way. Cheers!

On January 27, I said it was not yet time to sell stocks, but the technical situation has deteriorated quite rapidly since then. Yesterday (an FOMC day), stocks saw heavy volume selling action that produced another “distribution day” (a decline on increasing volume) in both the S&P 500 and NASDAQ Composite. In a healthy market, a few days of institutional selling over a 3 to 4-week period is normal and can typically be absorbed by demand. However, when the running count of distribution days reaches five or more, it nearly always signals a substantial correction is just around the corner. The 3-Part Test There are three main components that determine the mode of my broad market timing model, which determines whether I focus on the long or short side of the market, and how aggressively to do so. Right now, only one of those three tests is (barely) holding up. 1.) Volume Pattern Of Broad Market In the NASDAQ, yesterday was the seventh day of higher volume selling in recent weeks. As such, the volume pattern portion of my broad market timing model is now flashing a clear “sell” signal. 2.) Broad Market Trend In my January 27 blog post, I also mentioned one positive element of current market conditions was that both the NASDAQ and small-cap Russell 2000 were still holding above key support of their 50-day moving averages. But that is no longer the case. With all broad-based indexes now below their respective 50-day moving averages, the trend component of the timing model has shifted to a “sell” signal as well (though I would like to give it to the end of the week to see if the NASDAQ can bounce back). 3.) Performance Of Leadership Stocks The third and final component of our timing model, the performance of leadership stocks, is the only part of the model that is preventing the current “neutral” mode from officially shifting to “sell” mode. Still, even this portion is barely holding on. NASDAQ 4000 – Coming Soon? Taking an updated look at the daily chart of the NASDAQ (below), notice the tech-heavy index reversed lower after running into new resistance of its 50-day moving average yesterday (January 29). The index also closed near its intraday low, near the intraday low of January 27 (near-term support). If the price action follows through to the downside today (January 30), then bearish short-term momentum will likely take the index down to the 4,000 area (support of the December 2013 lows). However, a false move lower in the first hour of trading that subsequently reverses above the previous day’s high could lead to a short-term bounce: Although my newsletter is not yet in full “sell” mode, I have been laying low (in “neutral” mode) this week. But as a bonus, a positive earnings report from Facebook ($FB) has currently launched our existing long position to an unrealized gain of approximately 27% since our December 2 buy entry. The long side of the stock market is all about low volatility and steady/reliable price action. However, current conditions are quite volatile. Therefore, even if I spot new bullish setups on the long side of the market (such as $AMBA or $AL), the stock market is simply too unstable right now to add new exposure with confidence. Trade What You See, Not What You Think! Obviously, there are quite a few scenarios that could play out from here, and that is why we always shy away from predicting market action and worrying about where the major averages will go. Consistently profitable trading is all about reacting to price action, not predicting it. I can discuss different possibilities and have a plan in place, but I still have no clue what will happen tomorrow. If my timing model shifts into full “sell” signal, I will then start focusing on short selling stocks and ETFs with the most relative weakness. Nevertheless, with the market already down sharply in such a short period of time, there are simply no low-risk short entries at the moment. Chasing on the short side can be just as bad or worse than chasing longs. If you have ever been caught in a short squeeze, you know that the price action can explode higher for several days before taking a break. With the very real possibility of a significant correction just around the corner, this is a great time to review my preferred strategy for entering new trades on the short side. Upon doing so, you will surely see the importance of maintaining discipline and patience right now.

In the formative years of my trading career (late '90s), I frequently found myself scratching my head over an interesting problem. Despite analyzing the hell out of stock chart patterns, ensuring the technicals looked quite favorable before buying, I still found my trades completely going in the wrong direction way too often. Thanks to the help of a trusted trading mentor, I eventually discovered the problem; hyperfocusing primarily on the daily time frame. Although the daily chart has always been pivotal for locating low-risk buy setups, my extreme focus on that single time frame was causing me to ignore the power of confirmation from longer time frames (such as weekly and monthly charts). Put simply, I was missing the "big picture" and it was destroying my trading profits. Are you... Missing The Big Picture Too? Every technical trader has his own specific approach to scanning chart patterns and locating potential buy setups. Although I have my own, rule-based swing trading strategy, which has been thoroughly explained on my blog and nightly newsletter over the years, my trading system is just one of many types of successful trading methodologies out there. Nevertheless, there is one trading technique you (and every trader) should always use, regardless of your individual trading style: Multiple Time Frame Analysis Multiple Time Frame Analysis (let's call it "MTF" hereafter) is an extremely simple, yet incredibly powerful concept, that can be applied to analysis of stocks, ETFs, forex, futures, bitcoin, and any other financial instrument that can be charted. If you too have been making the same mistake of hyperfocusing only on the daily charts, read on to find out why you're missing the big picture of what's really happening with the stocks and ETFs you trade. Exploring For Oil On Multiple Time Frames One of the ETFs currently on my watchlist for potential buy entry is SPDR S&P Oil & Gas Exploration ETF ($XOP). Using MTF analysis, I will show you how this ETF actually landed on my swing trading watchlist. Starting with a long-term monthly chart showing at least 10 years of data or more (if possible), we see that $XOP stalled at resistance of its all-time high a few months ago. If you were buying $XOP based strictly on a daily chart with three to five years of data at that time, you probably would not have even seen the highs from 2008: Although $XOP pulled back after bumping into resistance of its 2008 high, the ETF firmly remains in an uptrend, above support of its rising 10-month moving average. Furthermore, the current base of consolidation is holding above the prior highs of 2011. The next step in my MTF analysis is to zoom in to the shorter-term weekly chart interval, where each bar represents a full week of price action: On the weekly chart, notice the 10-week moving average is trending lower, but the price is still holding above the 40-week moving average. The 10 and 40-week moving averages are similar to the popular 50 and 200-day moving averages on the daily chart. The current base of consolidation will take some time to develop, but as it chops around the 10-week moving average, the price should eventually flatten out and begin to tick higher. Finally, let's use MTF analysis to drill down to the benchmark daily chart time frame: The $XOP daily chart shows last week's price action holding above the prior swing low. If this low holds, the price action can begin to set "higher lows" with the base and form the right side of the pattern (learn more about base building patterns here). The next breakout in $XOP will likely be the one that launches the ETF to new highs on multiple time frames, which would be a very powerful buy signal. Still, if you were to only glance at the daily chart of $XOP, without taking into account the weekly and monthly chart patterns, you might understandably make the mistake of assuming this ETF is not in a steady uptrend. On the contrary, the "big picture" provided to you by MTF analysis definitely shows a dominant, long-term uptrend in place. Pullbacks and consolidations along the way, such as shown on this daily time frame, are completely normal. Why Longer Is Better Now that you understand the easy, yet crucial concept of MTF analysis, you may be wondering which individual time frame holds the most weighting, especially in the case of conflicting chart patterns. Remember, in the beginning of this article, when I told you about that problem I had when I first started trading? As I found out the hard way, a longer time frame always holds more weight over a shorter time frame. In the best, most promising stock trading setups, all three chart time frames (daily, weekly, monthly) will confirm the patterns of one another. But if that is not the case, just remember that a weekly trend is more powerful than a daily trend, while a monthly chart holds more sway than a weekly trend. Of course, you must also keep in mind that longer time frames also take a longer period of time to work themselves out. For example, daytrading based on a weekly chart pattern does not work. However, that same weekly chart is of paramount importance if you are looking to buy a stock as a core/position trade. There's no doubt in my mind that utilization of Multiple Time Frame Analysis will substantially increase your trading profits...but only if you make the decision right now to start applying this underrated technique to all your stock chart analysis.

Have you ever asked yourself, “What should be the minimum volume requirement for the stocks and ETFs I trade?” If so, you’re definitely not alone. It’s an important question, yet the answer is not black and white (despite what you may have heard from other traders). Read on and I will tell you why… What Is Average Daily Trading Volume? Why Does It Matter? Average Daily Trading Volume (“ADTV”) is a measure of the number of shares traded per day, averaged over a specific period of time (we use 50 days). While this is not a technical indicator that seeks to predict the future direction of an equity, it is nevertheless important because it helps traders to assess the liquidity of a stock or ETF. When a stock is highly liquid, you can easily enter and exit positions without directly influencing the stock’s price. Conversely, you can know which securities to avoid because they are too illiquid to trade. Knowing the ADTV of an equity is also important because it establishes a benchmark from which to spot key volume spikes that are the footprint of institutional accumulation. If, for example, a stock has an ADTV of 500,000 shares, but suddenly trades 2,000,000 shares one day, that means volume spiked to 4 times (400%) its average daily level. If such a volume surge was also accompanied by a substantial price gain for the day, it is a definitive sign that banks, mutual funds, hedge funds, and other institutions were supporting the stock. 4 Key Questions To Determine If A Stock Is Liquid Enough To Trade Although ADTV by itself could be used as a concrete “line in the sand” to determine if a stock is liquid enough to trade, there are too many other factors that play a part in that role. Following are four key questions that, when combined with ADTV, can help you to more accurately determine whether a stock can be traded or should be left alone. 1.) How Many Shares Will I Trade? (Size Matters) If you are only planning to buy 100 shares of a stock, the ADTV of an equity basically becomes a non-issue because it will be easy to liquidate such a small position, even in a very thinly traded stock. However, if you intend to buy 5,000 shares of that same stock, you need to more seriously consider whether or not it will be difficult to eventually exit the position with minimal slippage and volatility. Regardless of what you may have heard, size matters (at least in this scenario). 2.) How High Is The Average Dollar Volume? Average Dollar Volume (not to be confused with Average Daily Trading Volume) is a number that is determined by multiplying the share price of a stock times its average daily trading volume (ADTV). For example, a $25 stock with an ADTV of 800,000 shares has exactly the same dollar volume of a $50 stock with an ADTV of just 400,000 shares. In both cases, the Average Dollar Volume is 20 million ($25 X 800,000 or $50 X 400,000). For institutional investors and traders who rely on making big trades, Average Dollar Volume is a more important number than ADTV. In the example above, an institutional trader would consider both of those stocks to be equal with regard to liquidity. As a general rule of thumb, an Average Dollar Volume of 20 million or greater provides pretty good liquidity for most traders. If you trade a very large account (and accordingly large position size), consider an average dollar volume above 80 million to be extremely liquid. By knowing the Average Dollar Volume of a stock, you can lower your minimum ADTV requirement if the stock is trading at a higher price. 3.) How Long Will I Hold? Are you a daytrader, swing trader, or position trader? The length of time you typically hold stocks has a direct relationship to suitable minimum volume requirements. A daytrader who scalps for tiny 10 or 20 cent gains must limit himself to trading only in thick stocks where millions of shares per day change hands (equities with tight spreads and extremely high liquidity). On the other hand, a position trader who rides the profit in uptrending stocks for many months can trade in much thinner stocks because they can scale out of positions over the course of several days or weeks. Although I originally started as a daytrader (in the late ’90s), I now focus exclusively on swing and position trading stocks in my managed accounts and newsletter. 4.) Am I Trading Individual Stocks Or ETFs? In individual stocks, ADTV and/or Average Dollar Volume plays a big role in determining a stock’s liquidity. But with ETFs (exchange traded funds), average volume levels are largely irrelevant because ETFs are open-end funds. This means new units (shares) can be created or redeemed as necessary; supply and demand therefore has little effect. Even if an ETF has no buyers or sellers for several hours, the bid and ask prices continue to move in correlation with the market value of the ETF, which is derived from the prices of individual underlying stocks. As such, you should be much less concerned with the average volume of an ETF than with an individual stock. In my nightly stock and ETF pick newsletter, I generally use a minimum ADTV requirement of 100k-500k shares for individual stocks (depending on share size of the position), but may go as low as 50k shares for ETFs (in order to achieve greater asset class diversity). While liquidity is not of concern when trading ETFs, you should still be aware that ETFs with a very low ADTV may have wider spreads between the bid and ask prices. To remedy this, you may simply use limit orders in such situations. Since I trade for many points, not pennies, occasionally paying up a few cents does not bother me. For further details on the subject of ETFs and liquidity, check out Why ETF Trading Volume Does Note Determine ETF Liquidity. How To Easily Determine The Liquidity Of A Stock/ETF Although there are free financial websites that provide you with the ADTV and/or Average Dollar Volume of stocks, the fastest and best way to gauge the liquidity of a stock is by plotting the data on a stock chart of a quality trading platform. Below is the daily chart of SolarCity ($SCTY), which I bought in The Wagner Daily newsletter on December 19 (still long as of January 10, with an unrealized price gain of 26%): The chart above is pretty self-explanatory. The top section shows the price action (and a few moving averages), the middle shows daily volume bars and 50-day ADTV, and the bottom bars plot the Average Dollar Volume (in millions). With an ADTV of nearly 5 million shares and an Average Dollar Volume of 315 volume, $SCTY is a highly liquid stock that is “institutional-friendly.” It’s Important, But Don’t Get Hung Up If you want to avoid surprise price reactions when it comes time to close out your trades, pay attention to the ADTV and/or Average Dollar Volume of stocks. Doing so ensures there is sufficient liquidity to prevent your trades from directly affecting the stock prices. Nevertheless, you must realize that determining whether or not a stock has sufficient liquidity is not as clear-cut as merely picking an arbitrary number such as 500,000 minimum shares per day. Further, you should understand that Average Dollar Volume gives a more complete and accurate picture of a stock’s liquidity than ADTV alone. Your individual trading timeframe also plays a role in determining which stocks can be traded. Frankly, I feel many individual retail traders get too hung up about the average daily volume of a stock. Unless you’re a whale with a massive trading account, your individual transactions within a stock will usually have a minimal (if any) effect on the price. Of much greater importance is just focusing on buying leading stocks with strong institutional support (these stocks are typically quite active anyway). If a company has a history of outstanding earnings growth, or a revolutionary product that’s selling like suntan lotion at the beach, it’s even okay to buy thinly traded stocks. But just be sure to reduce your share size to compensate for greater price volatility (I always list our portfolio position size for each new stock/ETF pick.).

Well, I cannot yet claim to be a billionaire, but I will definitely say that longer holding periods are the way to go (at least for me). Not only does it tend to increase my profits, but it greatly reduces my stress too, which is a huge benefit. Just "set it and forget it" with regard to stops.

Thanks. Glad you liked it.

Quite a valid point. I guess you got me there! I suppose I need to rewrite the whole article now, eh? ;-) Deron

Thanks, Sergso. Glad you liked it. Deron

Many traders, particularly newbies, are on a continual quest to find the holy grail of trading. “If I could just find that one perfect trading system, the one that works every time, I’d be rich!” “Stock trading is too hard for me, but I know I will definitely make it big time if I start trading FOREX.” “FOREX is not working for me either, but I am certain I’ll make the big bucks once I switch to trading futures.” These and similar statements are signs that a trader is living in a fantasy world. Although Indiana Jones indeed found his holy grail (and a lion’s head), remember it was pure Hollywood fiction (albeit a fantastic work of art). I’ll talk more about the non-existent holy grail of trading later, but let’s get into the actual inspiration for this thought in the first place… A Sudden Flip Flop In Our Stock Market Bias After a few days of tight-ranged trading, stocks broke out to the upside on higher volume Wednesday (November 13), then built on those gains in the following session. The S&P 500, Dow Jones Industrials, and S&P Midcap 400 indices have all once again rallied to fresh all-time highs. The NASDAQ Composite has also broken out once more, and is trading at its highest level since the year 2000 “dot com” bubble. Although last week’s ugly selling action in leadership stocks and the main stock market indexes forced our timing model into "Neutral" mode on the close of November 6, the November 13 price and volume action in the stock market was convincingly bullish. While a few of the best leadership stocks were indeed hit hard last week, we have seen enough bullish price action this week to suggest that the market may still be able to push higher from here. The Trend Is Always Our Friend Because of the reasons above, we have placed our stock market timing model back into "Buy" mode. This does not mean the stock market will go higher from here, as the possibility for false breakouts in the major averages still exists. Nevertheless, with most leadership stocks still holding up well, we do not mind taking a few new shots on the long side. If new stock and ETF swing trade setups in our momentum swing trading newsletter trigger for buy entry and extend higher, then we will look to add more long exposure as new setups develop. If, however, our setups trigger for entry and quickly fall apart, we will simply be stopped out and forced back into cash. MTG Market Timing Model – Simple And Effective The core of our model for timing the stock marke (a key component of our Wagner Daily newsletter) is primarily based on the three elements below: * Accumulation/distribution patterns in the S&P 500 and NASDAQ Composite * The trend of all major averages – Are the S&P, NASDAQ, and Dow making ‘higher highs” and “higher lows” on the daily charts? Are they trading above their 50-day moving averages? * Price and volume action of leading stocks – This component is the heaviest weighting in determining our overall market bias * As you may have surmised, the composition of our market timing system is not fancy, but is quite effective and has a solid track record for accuracy. Still, determining the proper bias for the timing model requires a bit of elbow grease (scanning through tons of charts every night), as well as some discretion. Although many traders are on a quest to find the “holy grail” of trading systems, it simply does not exist. For example, absolutely no system in the world for timing the market works 100% of the time. Once a trader learns to accept that no trading strategy is perfect, and begins to understand that one only needs to slightly skew the mathematical probabilities in one’s favor to be a consistently profitable trader, only then can true progress be made.

Indeed, time will tell. Regardless, I just thought it's good time to remind all of us to not cling to an emotional opinion about ANY stock because it can be an extremely costly mistake when the trend eventually reverses and/or momentum dries up.

$600 is not unrealistic at all. However, I would personally only continue holding if willing to sit through a potentially significant pullback. Just my 2 cents, nothing more. Cheers, Deron

One benefit of Apple selling off today is that it's an excellent reminder to always Trade What You See, Not What You Think! No disrespect to the Apple fanboys, but I trade what the price and volume action tells me and keep emotions out of it. You should too... Ok, flame away!